Transcript chapter 19 ppt

SECTION 19.1
The Ownership of a Corporation
Accounting for a Corporation
A corporation may be owned by one person or
thousands. The ownership of a corporation is
represented by shares of stock.
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SECTION 19.1
The Ownership of a Corporation
Recording the Ownership of a Corporation
Corporations have a Capital Stock account instead of
the sole proprietorship’s owner’s capital account. This is
a stockholders’ equity account that is the value of the
stockholders’ claims to the corporation.
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SECTION 19.1
The Ownership of a Corporation
Reporting Stockholders’ Equity in a
Corporation
The owner’s equity section is called stockholders’ equity
and must be reported in two parts:
 equity contributed by the stockholders
 equity earned through business profits
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SECTION 19.1
The Ownership of a Corporation
Equity Contributed by Stockholders
Stockholders contribute to equity by purchasing shares
of stock. This amount is recorded in the Capital Stock
account.
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SECTION 19.1
The Ownership of a Corporation
Equity Earned Through Business Profits
The net income earned and retained by a corporation is
called retained earnings. This amount is recorded in
the Retained Earnings account.
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SECTION 19.1
The Ownership of a Corporation
Balance Sheet Presentation
Compare the capital section of the balance sheet to a
sole proprietorship and a corporation.
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SECTION 19.1
The Ownership of a Corporation
Characteristics of Financial Information
Financial statements are used by many groups:
 managers
 stockholders
 creditors
 government agencies, employees, consumers,
and the general public
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SECTION 19.1
The Ownership of a Corporation
Comparability
For accounting information to be useful, it must be
comparable. Comparability allows
 information to be compared from one period to
another, and
 the comparison of information between
businesses.
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SECTION 19.1
The Ownership of a Corporation
Reliability
Reliability refers to the confidence users have that
financial information is reasonably free from bias and
error.
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SECTION 19.1
The Ownership of a Corporation
Relevance
Relevance is the requirement that all information that
would affect decisions of financial statement users be
disclosed in the financial reports.
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SECTION 19.1
The Ownership of a Corporation
Full Disclosure
Full disclosure means that financial reports include
enough information to be complete.
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SECTION 19.1
The Ownership of a Corporation
Materiality
Materiality means that relevant information should be
included in financial reports.
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SECTION 19.1
The Ownership of a Corporation
A Corporation’s Financial Statements
A merchandising corporation can prepare four financial
statements:
 the income statement
 the statement of retained earnings
 the balance sheet
 the statement of cash flows
Many of today’s businesses depend on computers to
maintain the general ledger and subsidiary ledgers and
to prepare the end-of-period financial statements.
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SECTION 19.2
The Income Statement
The Income Statement
When preparing the income statement, the revenue
realization and the matching principles are applied.
Merchandising businesses have the cost of
merchandise purchased and resold to customers, so the
income statement has five sections instead of the
service business’s three sections:
 Revenue
 Cost of Merchandise Sold
 Gross Profit on Sales
 Operating Expenses
 Net Income (or Loss)
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SECTION 19.2
The Income Statement
The Revenue Section
This section reports the net sales for the period. To
complete the revenue section:
 Enter Revenue: at the left edge on the first line.
 On the second line, enter Sales (indented).
 Enter deductions from Sales on the next lines.
 Add the balances of the contra revenue accounts
and enter the total below Sales in the third
amount column.
 Enter the words Net Sales (indented) on the next
line. Subtract the total of the contra revenue
accounts from the Sales account and enter the
amount in the fourth amount column.
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SECTION 19.2
The Income Statement
The Revenue Section
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SECTION 19.2
The Income Statement
The Cost of Merchandise Sold Section
The cost of merchandise sold is calculated as follows:
Computing the cost of merchandise sold requires two
steps:
 Determine the cost of all merchandise available
for sale.
 Calculate the cost of merchandise sold.
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SECTION 19.2
The Income Statement
Calculating Cost of Merchandise
Available for Sale
Add net purchases to the beginning inventory amount.
Use the following to calculate net purchases:
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SECTION 19.2
The Income Statement
Calculating Cost of Merchandise Sold
Subtract the ending merchandise inventory amount from
the cost of merchandise available for sale to calculate
the cost of merchandise sold. The following is an
example of the Income Statement completed through
Gross Profit on Sales.
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SECTION 19.2
The Income Statement
Calculating Cost of Merchandise Sold
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SECTION 19.2
The Income Statement
The Gross Profit on Sales Section
The gross profit on sales is the profit made before
operating expenses are deducted. Subtracting the cost
of merchandise sold from net sales will give the gross
profit on sales.
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SECTION 19.2
The Income Statement
The Operating Expenses Section
The operating expenses are the costs of goods and
services used in the process of earning revenue.
Operating expenses can be further classified into
selling expenses (incurred to sell or market the
merchandise sold) and administrative expenses
(related to the management of the business).
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SECTION 19.2
The Income Statement
The Net Income Section
The federal corporate income tax amount is presented
separately on the income statement so the income
statement shows the amount of operating income.
Operating income is the amount of income earned
before deducting federal corporate income taxes.
An example follows of the completed Income Statement.
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SECTION 19.2
The Income Statement
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The Income Statement
SECTION 19.2
Analyzing Amounts on the Income
Statement
The information reported on financial statements is
expressed in dollars. Vertical analysis reports each
dollar amount as a percentage of a base amount, which
enables users to more easily view the relationships
among the items on the financial statements.
.
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SECTION 19.2
The Income Statement
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SECTION 19.3
The Statement of Retained
Earnings, Balance Sheet, and
Statement of Cash Flows
The Statement of Retained Earnings
A statement of retained earnings reports the changes
in the Retained Earnings account during the period.
The changes result from business operations and
dividends.
The statement is prepared from information on the work
sheet and is used when preparing the balance sheet.
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SECTION 19.3
The Statement of Retained
Earnings, Balance Sheet, and
Statement of Cash Flows
The Balance Sheet
The balance sheet reports the balances of all asset,
liability, and stockholders’ equity accounts for a specific
date. The assets are listed first, followed by the
Liabilities section and the Stockholders’ Equity section.
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SECTION 19.3
The Balance Sheet
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SECTION 19.3
The Statement of Retained
Earnings, Balance Sheet, and
Statement of Cash Flows
Analyzing Amounts on the Balance Sheet
Horizontal analysis uses dollar amounts expressed as
percentages to compare the same items on financial
statements for two or more accounting periods or dates.
A base period, usually a year, is used for comparison.
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SECTION 19.3
Analyzing Amounts on the Balance Sheet
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SECTION 19.3
The Statement of Retained
Earnings, Balance Sheet, and
Statement of Cash Flows
The Statement of Cash Flows
The information on the statement of cash flows is vital
for decision making. The statement shows a company’s
cash flow, which indicates the ability of the company to
pay its debts and pay dividends. Cash inflows come
into and cash outflows go out of a business.
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SECTION 19.3
The Statement of Cash Flows
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SECTION 19.3
The Statement of Retained
Earnings, Balance Sheet, and
Statement of Cash Flows
Cash Flows from Operating Activities
Operating activities include all transactions that
occurred during the accounting period as part of normal
business operations.
To determine operating cash inflows and outflows, the
income statement and balance sheet amounts are
converted to the cash basis of accounting.
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SECTION 19.3
The Statement of Retained
Earnings, Balance Sheet, and
Statement of Cash Flows
Cash Flows from Investing Activities
Investing activities include
 loans the business makes,
 payments received for those loans,
 purchase and sale of plant assets, and
 Investments.
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SECTION 19.3
The Statement of Retained
Earnings, Balance Sheet, and
Statement of Cash Flows
Cash Flows from Financing Activities
Financing activities are the borrowing activities needed
to finance the company operations and the repayment of
these debts.
The following table shows typical cash inflows and
outflows for operating, investing, and financing activities.
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SECTION 19.3
The Statement of Retained
Earnings, Balance Sheet, and
Statement of Cash Flows
Cash Flows from Financing Activities
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